Last week, Nelson from FinancialUproar took to Twitter to have a little fun in guessing the new hot topic in personal finance. Google accidentally released poor results early to the public and the stock got walloped.
Nelson left his thoughts:
Google is down 10%? Cue all the PF bloggers who automatically think it’s a good buy.
— Nelson Smith (@financialuproar) October 18, 2012
When Stocks are Cheap, and When they Aren’t
I like catching falling knives. As a bit of a contrarian, I like buying companies that are underappreciated and often recovering from financial misery. I especially like companies that make moves shareholders hate, like cutting their dividend.
Google’s cheaper today because of its results last week. In the earnings release, Google confirmed trends that I’ve been complaining about for a long time:
- Mobile is taking over. Mobile search is less profitable than desktop search. Mobile advertising in general is less profitable than desktop advertising, just ask Pandora.
- There are new competitive threats to the business. Google’s search dominates on the internet, but Apple’s Siri is quickly providing a competitive component in the fastest growing space – mobile and local searches. Apple’s Siri arguably erodes Google’s marketshare in the only part of Google search where the company has a long-term future, local search.
- The internet is becoming institutional. Five years ago I would have searched for the cheapest price for electronics before making a purchase. Today I just go to Amazon, which tends to always have the lowest prices on the internet after shipping costs and enough high-quality reviews to allow me to make an informed decision. Other consumers are doing this too – Google isn’t part of the sales chain for a growing proportion of online commerce.
These trends are not pretty, and I’m not sure how they play out. So I pass.
Tech: Business Where Consumers Win, Not Investors
Technology is always more kind to consumers than investors. In the 2000s it was a “sure bet” to buy GPS maker Garmin. Now everyone has a GPS either in their phone or as a standalone unit, but it’s not making anyone rich.
Zynga games have given me hours of entertainment, but it’s only destroyed billions of dollars in shareholder wealth. Facebook gives me a way to hear about every engagement and new baby in my social circle, but investors have only gotten burned. Eastman Kodak gave us a way to capture moments for lifelong enjoyment, but it eventually went bankrupt.
Technology is forever engaged in creative destruction. As an investor, it has the two worst attributes: high multiples and low visibility.
Stocks are bought and sold based on the future. No one should be willing to pay 20 times this year’s earnings for Google unless they can see 20 or 40 years out.
Do you know what Google will look like 10-20 years from now?
If you can honestly answer yes, then buy hand over fist (and please tell me what will come of Google’s self-driving car as I’m DYING to know.)
If not, join me in sitting on the sidelines as a casual observer. No one goes broke watching something they admit they can’t predict or understand.